Why and Where to Roll Over a 401k

It’s really simple to roll over a 401k, and if you’ve “separated from service” (lost your job or quit), you should do it. Roll your 401k to a self-directed IRA as soon as you can. Just make sure you do it right if you want to avoid the penalties. Here are the main benefits:

1. Wider Menu

By rolling the money over, you can invest your retirement money just about any way you like. If you roll the assets to a company like TD Ameritrade or Schwab, you’ll have thousands of investment choices. Even if you roll the money to a mutual fund company like Vanguard, you’ll have hundreds of funds to choose from.

2. Cost

When you evaluate mutual funds, you have to consider cost. But it’s almost impossible to know how much the 401k funds charge. If you roll the money over, you can select funds knowing what they charge you.

3. Beneficiaries

Many 401k plans restrict beneficiary planning. You select one person, and that’s it. That is a handicap you can’t and don’t have to tolerate. By rolling your IRA over, you have almost unlimited beneficiary planing options.

4. It’s harder to make really terrible investments mistakes.

I’m sure with the right motivation and effort you could lose everything by having a self-directed IRA, but it’s hard to do. With your 401k you might be tempted (or strongly “encouraged”) to put a big chunk of the assets into company stock. While that could work out for you, it could also end up being a disaster. Can you say E N R O N ? And while it’s rare employers have defrauded employees in the past. This something you don’t have to worry about if you get the money out from under the clutches of your former boss.

Are there reasons to leave your 401k as is after you leave your job? Sure. Most of them just don’t happen to be good reasons.

Now, the question of where to roll your 401k comes up, and it’s a rather simple to answer. You want to choose a fiduciary that is inexpensive and has a wide selection of investment choices.

Don’t roll your 401k to an insurance company or annuity. Your investment choices there are lousy and expensive. Worse, you’ll be tied to the investments for a very long time.

Also, don’t roll your 401k to a broker. These people work on commissions. If you need ongoing, objective financial advice, you’re not likely to find it there.

You could roll the money to a mutual fund – that would certainly be better than the two choices above, but still limited. You can only use the funds that the mutual fund company sponsors.

Your best IRA investment choices will be with a company like TD Ameritrade, Fidelity or Schwab. These are independent firms that offer a very broad investment menu and are pretty inexpensive too. If you want to make your own choices, you can use these firms.

Have you left old 401ks with your former employer? Why? Was it a good decision?

Comments

Great ideas. It’s unfortunate that many HR departments tell employees that “It doesn’t make any difference” if they roll their savings into an independent IRA. I’ve spoken to MANY who are in the dark on this subject. Perhaps the rollover process (or at least the process of informing) should be somehow regulated?

Of you want to invest in the stock market,I believe rolling your money into a managed money account where you pay a flat percentage and let the experts do the active trading, is a smart idea. That way you can avoid some of the load fees and get professional money management.

Good ideas. And they can roll their IRA into a new employer’s 401K, if the plan allows, if they decided they did not like having an IRA. The benefit of a 401k is age 55 penalty free withdrawal if unemployed after January 1 of the year you turn age 55 (thus it could be slightly before 55th birthday) and ability to get a loan. If those issues are not a reason to keep a 401k then it should be transferred to an IRA.

My wife rolled her 401k over to an IRA at a discount brokerage. This was great because of all the reasons you listed above. The choices are much better than if she kept it at her old employer. I would also consider rolling over to Vanguard.

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Who is Neal Frankle

I'm a Certified Financial Planner™ with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim. Read More »

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